Non-OECD China 1/2022

China

Update on the latest developments

China’s real GDP grew by 4.0% y-o-y in 4Q21, following growth of 4.9% y-o-y in 3Q21. The slowest pace of expansion in China’s economy since 2Q20 took place in 4Q21, due to multiple headwinds which hit the economy, including a property crisis, supply chain issues and COVID-19 outbreaks. Over 2021, China’s economy expanded by 8.1% y-o-y, the fastest expansion seen in a decade and in line with the Secretariat’s forecast, also exceeding the government’s target of above 6%. Nevertheless, recovery momentum is currently slowing amid a “zero-COVID-19” policy that authorities decided to apply in 2022, even in the face of the less severe Omicron variant. As a result, both private consumption and supply will remain disrupted. Additionally, the real estate downturn might affect consumption. However, the macroeconomic policy response to muted growth might be more accommodative. In November, retail trade growth dropped to 3.9% y-o-y from 4.9% the previous month. However, retail sales grew by 13.7% y-o-y from January to November 2021.

Industrial production in China expanded 4.3% y-o-y in December 2021, accelerating from a 3.8% growth in the previous month. The current uptick was supported by a recovery in energy production and moderation in raw materials prices. For the first eleven months of 2021, industrial production expanded by 10.1% y-o-y. Indeed, manufacturing investment was on the high side due to robust external demand, government incentives and improved profitability.

External demand continued to strongly support the economic recovery as the trade surplus widened sharply  to  $94.46  billion  in  December  2021  from $75.8 billion in December 2020. Exports extended $340.50 billion, marking growth of 20.9% y-o-y, while imports    grew   at    a    softer    rate    of    19.5% to $246.04 billion.

China’s trade surplus with the US stood at $39.23 billion in December and $396.58 billion over 2021, marking a 25% increase compared with 2020.

Over 2021, China’s trade surplus widened to $676.4 billion, the highest figure on record and up from $524 billion in 2020. Exports surged by 29.9% and imports by 30.1%.

On the inflationary pressure front, government efforts to secure supply helped China’s CPI to drop to 1.5% y-o-y in December from 2.3% in November. On a monthly basis, consumer prices unexpectedly declined by 0.3%, after seeing a 0.4% gain in November. Similarly, producer price inflation eased to 10.3% y-o-y in December from 12.9% in November, marking the lowest rate since August. On a monthly basis, producer prices dropped by 1.2% compared with November. Over the whole of 2021, PPI inflation stood at 8.1% y-o-y.

Currently, external demand still supports the economic recovery, but the trade surplus fell to $71.7 billion in November from $74.25 billion the same month a year earlier. Export growth slowed due to the strong yuan exchange rate, weakening demand due to the emergence of Omicron and higher costs. Meanwhile, imports rose at a faster pace following easing of the power crunch. Over the first 11 months of 2021, the trade surplus widened to $582.3 billion from $448.2 billion over the same period in 2020.

Similar to other economies around the globe, inflationary pressures on the producer side have increased noticeably, mirroring the power crunch impact as it reached a 25-year high of 13.5% y-o-y in October. In November, producer price inflation eased to 12.9% y-o-y, reflecting the government’s efforts to control surging commodity prices and an easing power crunch. Meanwhile, China’s 2021 consumer price inflation accelerated to 2.3% y-o-y from 1.5% y-o-y a month earlier.

Near-term expectations

A power shortage and property sector crisis in 3Q21, along with the lingering effects of ongoing COVID-19 outbreaks, combined with supply chain disruptions, might continue to weigh on the short-term economic outlook. However, the easing of electricity shortages may help disruptions in manufacturing output, though government-housing control policies are weighing on property investment, which might lead to a further slowdown. Despite there being more room for additional policy support, policymakers need to maintain balance and shore up short-term growth and may face a critical challenge in finding the right balance between controlling the latest COVID-19 outbreak and maintaining normal economic activity. In the meantime, People’s Bank of China (PBOC) policy is likely to try to ensure ample liquidity in the inter-banking market. On the fiscal policy front, the government may ease its stance on local government bond use and accelerate project approvals.

All December PMI indices have risen. The composite PMI increased to 53.0 in December from 51.2 a month earlier, marking the fourth-straight month of growth in private sector activity and the strongest pace since July, amid stronger output growth across both the manufacturing and service sectors. The manufacturing PMI increased to 50.9 in December from 49.9 in November, as the impact of scattered COVID-19 cases seemed to be under control. Similarly,  the  services   PMI  edged  up  to  53.1   in December from 52.1 in November, as services business activity and new orders expanded at a faster pace, supported by a rise in export orders.

However, business sentiment in both the manufacturing and services sectors deteriorated to its lowest point in 15 months amid worries and uncertainty over the pandemic.

As uncertainty regarding the short-term economic outlook for China is still very high, the country’s real GDP forecasts for 2021 and 2022 were kept unchanged from the last MOMR at 8.0% and 5.6%, respectively.